Takenfrom El País
Energy markets are reacting to the worst possible scenario, one that could have unforeseen consequences: Russia's invasion of Ukraine. Natural gas, a fuel for which the EU relies heavily on the Eurasian giant, surged 30% on Thursday in an unprecedented session, reaching a peak of 60%. The $115 per megawatt-hour it was trading at late in the afternoon is six times higher than it was just a year ago. Meanwhile, Brent —the European benchmark—shattered the $100 mark—a level not seen since 2014—and threatens to prolong the recent brutal surge in gasoline and diesel prices.
The severity of the new round of economic sanctions that Brussels is preparing to try to economically cripple the Kremlin will be key to gauging how high the price of energy commodities can go. Although Russian President Vladimir Putin has repeatedly pledged not to cut off gas or oil supplies —a move he couldn't afford to make overnight at a time when military spending is soaring—his credibility is at an all-time low following the ground and air attack on his neighboring country.
“It all depends on how Europe and the United States respond,” notes Hans van Cleef, senior economist at the Dutch bank ABN Amro. “Will they impose sanctions on the oil and gas sectors or not?” he asks. “Oil and gas prices have become the best barometer of fear during this crisis: any disruption to flows from Russia to Europe, whether due to damage to the products or sanctions, would worsen the current supply shortage,” adds Norbert Rücker, head of economic analysis at the investment bank Julius Baer, in a note to clients in which he also poses several questions for reflection: “Will the West impose severe sanctions on Russia despite the high economic cost that a further rise in oil prices would entail? Will China and India [net energy importers] become involved in the conflict if they also bear some of the economic costs? Will oil-producing countries yield to Western pressure and lift their supply restrictions to pump more crude?”.
The rising cost of oil and gas is having catastrophic consequences for inflation in Europe, a variable already at a level unseen for decades. This is due both to the increase in the price of automotive fuels—which were already at record highs well before crude oil broke the $100 per barrel barrier—and to the rise in the price of heating oil and electricity, both of which are highly dependent on what happens in the natural gas market.
Just over 40% of the oil consumed by the European Union comes from Russia, according to Eurostat data, a figure that hovers around 25% for natural gas. However, this overall picture masks significant differences between member states: while in Germany and other Central European countries two-thirds of their natural gas comes from Russia, in Spain the figure barely reaches 10%. The same is true for oil: Germany buys about a third of its oil from Moscow, while in Spain that figure is barely 5%. An additional problem is that the EU's strategic gas reserves are at their lowest level in over a decade.
The European Commission is currently working on contingency plans to find alternative sources of fuel supply. This effort includes, for example, talks with the US, Qatar, and Norway to increase the volume of natural gas imported by ship, an amount that has risen exponentially since the start of the energy crisis. Although gas is the most pressing issue at the moment, Brussels is also considering alternatives for importing crude oil, which currently comes from Russia, the world's second-largest producer with a market share of nearly 10%.
The EU, as European Commissioner for Energy Kadri Simson emphasized on Monday, is “prepared even for the worst-case scenario.” The situation, she said during a visit to Madrid, “is pretty much covered” for the final stretch of winter. Similarly, the Spanish government's Third Vice-President and Minister for Ecological Transition, Teresa Ribera, stressed on Thursday that the supply “is guaranteed” but underlined that Spain “may be affected” by rising energy prices “on all fronts.”
